Will Netflix really steal traditional TVs crown?

The streaming service claims its impressive growth spells doom for its rivals but it may be less revolutionary than it thinks

Netflix is unquestionably an internet-era success story. From a domestic US DVD rental business to a global leader in on-demand entertainment in just 20 years is quite something. The numbers are undeniably impressive. Some 79 million subscribers, 192 countries, billions of dollars in revenues and here in Britain from zero to five million subscribing households in just four years. Throw in the companys growing commitment to creating original content of the highest quality something many observers never thought it would manage and its unarguably a huge achievement.

Ill bet there are few traditional TV executives who havent felt the chill wind of the Netflix effect, or rather the jitters about the damage the service might do to their linear TV businesses. Meanwhile Netflix has talked up the existential threat it sees itself posing to traditional TV. On its website Netflix says, People love TV content but they dont love the linear TV experience It forecasts the certain death of traditional TV, a process in which, Netflix says, it is the leading player. They say its a revolutionary change as significant in historical terms as the invention of TV itself.

But are consumers really moving decisively away from linear TV to embrace on-demand instead? And does Netflix, for all its considerable achievements, have a sustainable business model strong enough to see off the challenges it is facing not least from the big beasts of traditional TV?

In the US, where pay-TV penetration is perhaps amongst the highest in the world, with many millions of people signed up to expensive long-term cable TV contracts, Netflix has managed to persuade millions of people to switch to its relatively low-cost, one month at a time, unlimited (all you can eat) service. But the same is not true in the UK. Here the majority of Netflix subscribers are also subscribers to Sky or Virgin pay TV services neither of which appear to have lost customers as a result. Which suggests that Netflix is being taken up mainly by people who see it as a complement to what they already get rather than a replacement.

And when you look at consumption patterns a similar picture emerges. Whereas Netflix generates on average roughly 38 minutes of viewing per day in households that have it, linear TV generates more like 3.5 hours of viewing per household on average and well over 2 hours a day even amongst the younger, so-called Netflix generation. A billion hours streamed by Netflix compares to 65 billion hours streamed (ok, broadcast) by linear TV. And although Netflix offers a great service simple, smart, easy to use and relatively inexpensive, and although some of its original programming is getting widely talked about and often praised for its quality, t here is little to suggest that people are, as yet, doing anything more revolutionary than adding it to their existing TV diet.

Meanwhile, the costs of its huge global expansion have been, as the company admits, substantial. And the amount spent on content overall is reported to be up around the $10bn mark with some $1.4bn of that accounted for by original commissions including the 100m series The Crown about the British royal family.

One reason to doubt Netflixs ability to overturn the existing order is its strategic vulnerability. Original content is eye-catching and plainly a real draw for subscribers, but the Netflix service is still hugely dependent on movies and TV series that have to be licensed from the big players in traditional TV. In that world two factors are at play that do not go in Netflixs favour.

First, all of those established players already have internet-based on-demand services of their own think BBC iPlayer, BBC Store, Hulu, Sky Now and so on. And in the case of Sky there are lucrative deals already in place with Hollywood studios, HBO and Showtime that effectively deny Netflix access to attractive content. Secondly, the more successful Netflix becomes the more those rights holders will try to make it pay for their content something that is already creating a real squeeze on its margins. And that is before anyone mentions other very deep-pocketed players such as Amazon.

Its hard to see exactly how all this will play out. On-demand viewing is now part of many peoples TV lives and will doubtless continue to grow. But its impact on traditional broadcasters such as the BBC may be much more limited than they fear and almost certainly less than Netflix hopes.